GST to have very positive effect in the long term: Raghuram Rajan

Raghuram Rajan feels a substantial part of the growth slowdown in India was because of the after-effects of the demonetisation.

Davos: Former RBI governor Raghuram Rajan feels a substantial part of the growth slowdown in India was because of the after-effects of the demonetisation decision of November 2016.

“I think the jury is still out. We have an argument that it will improve compliance till we see the last tax numbers in, I feel the jury is still out. That said, I would suspect that a substantial part of the growth slowdown was because of the effects (of demonetisation)… some of it was in the informal economy which weren’t immediately captured, which we are seeing now. Businesses that have shut down, because they couldn’t survive that episode,” Rajan told a TV channel.

He said to understand the positive impact of demonetisation “we have to wait and see”.

“I think it did give some fillip to the digital payments system. But that’s relatively smaller… compared to the other (aspects).”

Asked whether he would have taken up demonetisation during his tenure, Rajan said, “This is an easy sort of answer to give in hindsight. I think the government at that time asked us our views… we gave them. But at the same time, I think its very hard. I didn’t think it would have the desired effect. And that it would have cost.”

He added, “Yes, any monetary economist would say that, better print the money before taking it away. But, that said I think the real sort of question is, should the RBI be a fifth column if the government wants to go ahead on something. In my guess, both legally and ethically you can’t stop the institution. You may refuse to along with it, but you cannot stop the institution.

Regarding the Goods and Services Tax regime, he said, “Now I think in the long term GST will have a very positive effect. There are people who say we should have prepared better, we should have delayed it. My sense is many of the problems just come from doing it. So, if we solve those problems and go forward that will be very beneficial.”